nep-mac New Economics Papers
on Macroeconomics
Issue of 2008‒04‒15
43 papers chosen by
Soumitra K Mallick
Indian Institute of Social Welfare and Bussiness Management

  1. Optimal Fiscal and Monetary Policy under Sectorial Heterogeneity By Berriel, Tiago; Sinigaglia, Daniel
  3. Inflation and Unemployment in the Long Run By Aleksander Berentsen; Guido Menzio; Randall Wright
  4. Forward Guidance for Monetary Policy: Is It Desirable? By Hans Gersbach; Volker Hahn
  5. Current Account Dynamics and Monetary Policy By Andrea Ferrero; Mark Gertler; Lars E.O. Svensson
  6. Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence By Alan S. Blinder; Michael Ehrmann; Marcel Fratzscher; Jakob De Haan; David-Jan Jansen
  7. Consumption risk sharing over the business cycle: the role of small firms' access to credit markets By Mathias Hoffmann; Iryna Shcherbakova
  8. Ensuring financial stability: financial structure and the impact of monetary policy on asset prices By Katrin Assenmacher-Wesche; Stefan Gerlach
  9. Estimating a Supply Block for Poland By Rafal Kierzenkowski; Patrice Ollivaud; Franck Sédillot; Philippe Briard
  10. Globalisation and the determinants of domestic inflation By William R White
  11. Real-Time Measurement of Business Conditions, Second Version By S. Boragan Aruoba; Francis X. Diebold; Chiara Scotti
  12. Do survey indicators let us see the business cycle ? A frequency decomposition By Luc Dresse; Christophe Van Nieuwenhuyze
  13. Structural breaks in the lending interest rate pass-through and the euro By Giuseppe Marotta
  14. Monetary Persistence and the Labor Market: A New Perspective By Wolfgang Lechthaler; Christian Merkl; Dennis Snower
  15. Fiscal Policy Effects on Economic Growth: Short Run vs Long Run By Kalle Kukk
  16. The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models By Jón Steinsson
  17. Reexamination of Real Business Cycles in A Small Open Economy By Zuzana Janko
  18. Global Excess Liquidity and House Prices - A VAR Analysis for OECD Countries By Ansgar Belke; Walter Orth
  19. Adjustment Costs in a Real Business Cycle Model By Zuzana Janko
  20. Monetary Aspects of a Thermodynamic Theory of Economics An application to the UK Economy 1969-2006 By John Bryant
  21. Interest Rates and the Exchange Rate: A Non-Monotonic Tale By Viktoria Hnatkovska; Amartya Lahiri; Carlos A. Vegh
  22. Larger crises cost more: impact of banking sector instability on output growth By Dobromil Serwa
  23. Has the Chinese economy become more sensitive to interest rates? Studying credit demand in China By Koivu, Tuuli
  24. Persistent Business Cycles and High Economic Growth: How to Explain Their Long Concurrence in Modern Capitalism? By Victor Zarnowitz
  25. Imperfect Competition, Nominal Wage Contracts and the Business Cycle By Zuzana Janko
  26. Banking crises and nonlinear linkages between credit and output By Dobromil Serwa
  27. Credit creation and control: an unresolved issue in Islamic banking By Hasan, Zubair
  28. Can Consumer Sentiment and Its Components Forecast Australian GDP and Consumption? By Chew Lian Chua; Sarantis Tsiaplias
  29. A perspective on the new types of money as the organization's answer to the challenges of the globalization By Drumea, Cristina
  30. The existence of Nash equilibria in n-player LQ-games, with applications to international monetary and trade agreements. By Di Bartolomeo Giovanni; Acocella Nicola; Hughes Hallett Andrew
  31. American and European Financial Shocks: Implications for Chinese Economic Performance By Rod Tyers; Iain Bain
  32. Competition-oriented Wage Policy and Its Effects on Aggregate Demand in the Netherlands By Stefan Ederer
  33. Was the Barrier to Labor Mobility an Important Factor for the Prewar Japanese Stagnation? By Aoki, Shuhei
  34. The Debt-adjusted Real Exchange Rate for China By Frait, Jan; Komárek, Luboš
  35. Policy Uncertainty and Precautionary Savings By Francesco Giavazzi; Michael McMahon
  37. The Euro May Over the Next 15 Years Surpass the Dollar as Leading International Currency By Menzie D. Chinn; Jeffrey A. Frankel
  38. Bank Incentives, Contract Design, and Bank Runs By Andolfatto, David
  39. The Dynamic Effects of Adjustment Costs and Leisure Habit in a Model with Stochastic Wage Staggering By Zuzana Janko
  40. Timing of innovation policies when carbon emissions are restricted: an applied general equilibrium analysis By Tom-Reiel Heggedal and Karl Jacobsen
  41. Dolarización y Pobreza en Ecuador By Ricardo N. Bebczuk
  42. Employment Effects of Minimum Wages in Inflexible Labor Markets By Ozturk, Orgul
  43. Solution of the Ellsberg paradox by means of the principle of uncertain future By Harin, Alexander

  1. By: Berriel, Tiago; Sinigaglia, Daniel
    Abstract: This paper characterizes optimal fiscal and monetary policy in a new-keynesian model with sectorial heterogeneity in price stickiness. In particular, we (i) derive a purely quadratic welfare-based loss function from an approximation of the consumer's utility function and (ii) provide the optimal target rule for fiscal and monetary policy. Differently from the homogeneous case, the loss function includes sectorial inflation variances instead of aggregate inflation variance, with weights on the variance of sectorial inflation proportional to the degree of price stickiness. The optimal policy response to a sector-specific cost-push shock leads to movement in output gap, inflation and taxation in all sectors. Optimal taxes are more responsive to shocks in sectors with stickier prices.
    Keywords: optimal taxation; optimal monetary policy, heterogeneity in price-stickiness;
    JEL: E52 E63
    Date: 2008–04–01
  2. By: Michael Krause; David Lopez-Salido; Thomas Lubik
    Abstract: The New Keynesian Phillips curve explains inflation dynamics as being driven by current and expected future real marginal costs. In competitive labor markets, the labor share can serve as a proxy for the latter. In this paper, we study the role of real marginal cost components implied by search frictions in the labor market. We construct a measure of real marginal costs by using newly available labor market data on worker finding rates. Over the business cycle, the measure is highly correlated with the labor share. Estimates of the Phillips curve using GMM reveal that the marginal cost measure remains significant, and that inflation dynamics are mainly driven by the forward-looking component. Bayesian estimation of the full New Keynesian model with search frictions helps us disentangle which shocks are driving the economy to generate the observed unit labor cost dynamics. We find that mark-up shocks are the dominant force in labor market fluctuations.
    JEL: E24 E32 J64
    Date: 2008–03
  3. By: Aleksander Berentsen; Guido Menzio; Randall Wright
    Abstract: We study the long-run relation between money, measured by inflation or interest rates, and unemployment. We first discuss data, documenting a strong positive relation between the variables at low frequencies. We then develop a framework where both money and unemployment are modeled using explicit microfoundations, integrating and extending recent work in macro and monetary economics, and providing a unified theory to analyze labor and goods markets. We calibrate the model, to ask how monetary factors account quantitatively for low-frequency labor market behavior. The answer depends on two key parameters: the elasticity of money demand, which translates monetary policy to real balances and profits; and the value of leisure, which affects the transmission from profits to entry and employment. For conservative parameterizations, money accounts for some but not that much of trend unemployment -- by one measure, about 1/5 of the increase during the stagflation episode of the 70s can be explained by monetary policy alone. For less conservative but still reasonable parameters, money accounts for almost all low-frequency movement in unemployment over the last half century.
    JEL: E24 E52
    Date: 2008–04
  4. By: Hans Gersbach (CER-ETH Center of Economic Research at ETH Zurich, Switzerland); Volker Hahn (CER-ETH Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: In this paper we assess whether forward guidance for monetary policy regarding the future path of interest rates is desirable. We distinguish between two cases where forward guidance for monetary policy may be helpful. First, forward guidance may reveal private information of the central bank. We argue that vague, non-binding statements may be desirable. Second, forward guidance may be used as a commitment device. In this case, policy forecasts may be desirable in a classic inflation-bias framework but not in a New Keynesian framework.
    Keywords: central banks, transparency, commitment, Federal Reserve, policy inclinations, signaling
    JEL: E58 D70
    Date: 2008–04
  5. By: Andrea Ferrero; Mark Gertler; Lars E.O. Svensson
    Abstract: We explore the implications of current account adjustment for monetary policy within a simple two-country DSGE model. Our framework nests Obstfeld and Rogoff's (2005) static model of exchange rate responsiveness to current account reversals. It extends this approach by endogenizing the dynamic adjustment path and by incorporating production and nominal price rigidities in order to study the role of monetary policy. We consider two different adjustment scenarios. The first is a "slow burn" where the adjustment of the current account deficit of the home country is smooth and slow. The second is a "fast burn" where, owing to a sudden shift in expectations of relative growth rates, there is a rapid reversal of the home country's current account. We examine several different monetary policy regimes under each of these scenarios. Our principal finding is that the behavior of the domestic variables (for instance, output, inflation) is quite sensitive to the monetary regime, while the behavior of the international variables (for instance, the current account and the real exchange rate) is less so. Among different policy rules, domestic inflation targeting achieves the best stabilization outcome of aggregate variables. This result is robust to the presence of imperfect pass-through on import prices, although in this case stabilization of consumer price inflation performs similarly well.
    JEL: E0 F0
    Date: 2008–04
  6. By: Alan S. Blinder; Michael Ehrmann; Marcel Fratzscher; Jakob De Haan; David-Jan Jansen
    Abstract: Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication -- mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy.
    JEL: E52 E58
    Date: 2008–04
  7. By: Mathias Hoffmann; Iryna Shcherbakova
    Abstract: Consumption risk sharing among U.S. federal states increases in booms and decreases in recessions. We find that small firms' access to financial markets plays an important role in explaining this stylized fact: business cycle fluctuations in aggregate risk sharing are more pronounced in states in which small firms account for a large share of output. In addition, better access of small firms to credit markets in the wake of state-level banking deregulation during the 1980s seems to have loosened the dependence of aggregate risk sharing on the business cycle. Not only do our result support that better access to credit markets may have made it easier for the owners of small firms to smooth income in the face of adverse cash-flows shocks to their business. They also suggest an additional welfare benefit from banking deregulation: access to financial markets has become more reliable and is more easily available when households and firms need it most urgently - in economic downturns. A possible implication of these findings is that the welfare costs of a monetary tightening could have been substantially reduced as a result of the financial liberalization at the state level.
    Keywords: Interstate risk sharing, regional business cycle, proprietary income, state banking deregulation
    JEL: E32 E44 F3
    Date: 2008–03
  8. By: Katrin Assenmacher-Wesche; Stefan Gerlach
    Abstract: This paper studies the responses of residential property and equity prices, inflation and economic activity to monetary policy shocks in 17 countries, using data spanning 1986-2006. We estimate VARs for individual economies and panel VARs in which we distinguish between groups of countries on the basis of the characteristics of their financial systems. The results suggest that using monetary policy to offset asset price movements in order to guard against financial instability may have large effects on economic activity. Furthermore, while financial structure influences the impact of policy on asset prices, its importance appears limited.
    Keywords: Asset prices, monetary policy, panel VAR
    JEL: C23 E52
    Date: 2008–03
  9. By: Rafal Kierzenkowski; Patrice Ollivaud; Franck Sédillot; Philippe Briard
    Abstract: The supply-side framework and related measures of output and unemployment gaps play a leading role in the OECD analysis of short-term conjunctural conditions and long-term determinants of growth. To allow such diagnoses for Poland, this paper develops a comprehensive supply block in accordance with the OECD approach. The structural unemployment rate is derived from a Phillips-curve equation and, along with working age population, is combined with filter-based estimates of trend labour productivity, participation rates and hours worked per employee to generate measures of potential output. The performance of the model in capturing price pressures underlying the growth trajectory of the Polish economy is assessed, and measures of cyclically-adjusted general government net lending are provided. Based on the OECD autumn 2007 projections for 2008 and 2009, out-of-sample simulations derived from the Phillips-curve model suggest that CPI inflation is likely to continue to trend upward, exceeding the central bank?s inflation target by a wide margin. <P>Estimation du bloc offre pour la Pologne <BR>Le bloc d'offre et les mesures associées d'écarts de production et de taux de chômage jouent un rôle de premier plan dans l'analyse des conditions conjoncturelles à court terme et des déterminants de la croissance à long terme faite par l'OCDE. Afin de permettre de tels diagnostics pour la Pologne, cette étude développe un bloc d'offre détaillé selon l'approche de l'OCDE. Le taux de chômage structurel est déduit à partir d'une équation de type Phillips et, conjointement avec la population en âge de travailler, est combiné à des estimations tendancielles de productivité du travail, de taux de participation et des heures travaillées par employé pour donner lieu à une mesure du niveau de production potentiel. La performance du modèle pour rendre compte des pressions de prix sous-jacentes à la trajectoire de croissance de l'économie polonaise est évaluée, et les mesures du déficit budgétaire ajusté du cycle sont fournies. Sur la base des projections de l'OCDE pour les années 2008 et 2009 réalisées à l'automne 2007, des simulations hors échantillon déduites à partir du modèle de la courbe de Phillips mettent en évidence que, selon toute vraisemblance, l'inflation IPC poursuivra sa tendance haussière, dépassant la cible d'inflation de la banque centrale de façon significative.
    Keywords: OECD, transition economies, OCDE, Poland, Pologne, économie en transition, production function, potential output, medium-term projections, macroeconomic modelling, modélisation macroéconomique, fonction de production, production potentielle, projections de moyen terme
    JEL: C53 E22 E23 E27 E52 P24
    Date: 2008–04–01
  10. By: William R White
    Abstract: The remarkable stability of low domestic inflation in many countries requires explanation. In this paper, a number of competing hypotheses are evaluated on a stand-alone basis, and all are found to be inadequate. This includes the view that this outcome has been solely the result of more effective disinflationary monetary policies. However, a combination of these hypotheses (including a significant role for increased global competition) seems to provide a plausible explanation, not only for continuing low inflation, but also its coexistence with rapid growth and low real interest rates. Unfortunately, the analysis also leads to the conclusion that rising inflation, unwinding financial imbalances, or both, could easily follow the welcome stability seen to date.
    Keywords: inflation, monetary policy, globalisation, Phillips curve
    Date: 2008–03
  11. By: S. Boragan Aruoba (Department of Economics, University of Maryland); Francis X. Diebold (Department of Economics, University of Pennsylvania and NBER); Chiara Scotti (Federal Reserve Board, Division of International Finance)
    Abstract: We construct a framework for measuring economic activity at high frequency, potentially in real time. We use a variety of stock and flow data observed at mixed frequencies (including very high frequencies), and we use a dynamic factor model that permits exact filtering. We illustrate the framework in a prototype empirical example and a simulation study calibrated to the example.
    Keywords: Business cycle, Expansion, Recession, State space model, Macroeconomic forecasting, Dynamic factor model, Contraction, Turning point
    JEL: E32 E37 C01 C22
    Date: 2007–03–01
  12. By: Luc Dresse (National Bank of Belgium, Research Department); Christophe Van Nieuwenhuyze (National Bank of Belgium, Research Department)
    Abstract: This paper uses a frequency domain approach to gain insight into the correlation between survey indicators and year-on-year GDP growth. Using the Baxter-King filter, we split up each series into three components: a short-term, a business cycle (oscillations between 18 and 96 months) and a long-term component. We then calculate how much of the variation of the survey series and GDP growth can be ascribed to these different components. Finally, we use this information together with an analysis of the correlation between survey indicators and year-on-year GDP growth at the different frequencies to explain their overall correlation. We show that survey indicators, similar to year-on-year GDP growth, do not perfectly reflect business cycle movements but contain cycles of other frequencies. Long-term cycles, in particular, are a nontrivial part of the series' variance. Furthermore, there exist some clear relations between the weight of these cycles in the survey indicators and their correlation with GDP growth. In general, the larger the business cycle component, the larger the correlation, while the opposite is true for the short-term component. The evidence for the long-term component is mixed: although a long-term component seems necessary as the correlation at this frequency is the highest, strong or weak long-term components are typically idiosyncratic, dragging down the overall correlation between the indicator and year-on-year GDP growth. The paper applies this methodology to the euro area countries (EC survey indicators) and to Belgium separately (NBB business survey indicators). The results are highly comparable
    Keywords: Baxter-King, spectral analysis, survey indicators, correlation
    JEL: C22 E32
    Date: 2008–03
  13. By: Giuseppe Marotta
    Abstract: This paper investigates whether size and speed of the pass-through of market rates into short term business lending rates have increased in the wake of the introduction of the euro. Allowing for multiple unknown structural breaks we find two in four EMU countries, and in the UK as well, and a single one in five other countries. The pattern of dates fits national banking systems adjusting slowly to the new monetary regime and suggests caution in associating structural changes to the introduction of the euro. The estimated equilibrium pass-through in the last break-free period is on average more incomplete, hinting at a reduced effectiveness of the single monetary policy. This results runs against the economic intuition that a reduced volatility in money market rates is bound to mitigate uncertainty and to ease therefore the transfer of policy rate changes to retail rates; the run up to Basel 2 and a deterioration of competition in loan markets could be the motivations. Caution in extrapolating to more recent periods these findings is suggested by the differences between the unharmonized and the new harmonized retail rates.
    Keywords: Interest rates; Monetary policy; European Monetary Union (EMU); Cointegration analysis; Taylor principle
    JEL: E43 E52 E58 F36
    Date: 2008–03
  14. By: Wolfgang Lechthaler; Christian Merkl; Dennis Snower
    Abstract: It is common knowledge that the standard New Keynesian model is not able to generate a persistent response in output to temporary monetary shocks. We show that this shortcoming can be remedied in a simple and intuitively appealing way through the introduction of labor turnover costs (such as hiring and firing costs). Assuming that it is costly to hire and fire workers implies that the employment rate is slow to converge to its steady state value after a monetary shock. Under reasonable calibrations, the after-effects of a shock continue to exert an effect on the labor market even long after the shock is over. The sluggishness of the labor market translates to the product market and thus the output effects of the monetary shock become more persistent. Our model is able to generate a hump-shaped response in output, if the monetary shock includes a moderate autoregressive component. This is another empirically well known feature, which the standard model is not able to replicate.
    Keywords: Monetary Persistence, Labor Market, Hiring and Firing Costs
    JEL: O4
    Date: 2008–03
  15. By: Kalle Kukk (Department of Economics, Tallinn University of Technology)
    Abstract: There are two important aspects to take into account while analysing fiscal policy effects on economic growth. First, it should be made clear whether Keynesian short-run or classical long-run effects are the object of interest. Second, the relations between different fiscal and macroeconomic variables should be identified – all possible simultaneous changes in other fiscal and macroeconomic indicators should be taken account of while analysing the effect of any fiscal policy decision on economic growth. As demonstrated in this article, Keynesian principles do not seem to hold as fiscal policy cannot have any remarkable impact on economy in a short run. But it is confirmed that in the long run, expansionary fiscal policies are not beneficial to the economy generally. For a government it is essential to recognise that changes in different revenue and expenditure categories may have the same impact on budget balance and on total government revenue and expenditure but they have different effects on economic growth in the long run. For example, fiscal policy decisions have different effects depending on whether to save increased revenue, to spend it for current expenditure or to use it for public investment.
    Keywords: fiscal policy, economic growth, budget deficit, government revenue, government expenditure, taxes
    JEL: H1 H2 H5 H6 E1 O4
    Date: 2007
  16. By: Jón Steinsson
    Abstract: Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies. This fact can help explain why existing sticky-price business cycle models have been unable to match the persistence of the real exchange rate. The recent literature has focused on models driven by monetary shocks. These models yield monotonic impulse responses for the real exchange rate. It is extremely difficult for models that have this feature to match the empirical persistence of the real exchange rate. I show that in response to a number of different real shocks a two-country sticky-price business cycle model yields hump-shaped dynamics for the real exchange rate. The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate.
    JEL: F31 F41
    Date: 2008–04
  17. By: Zuzana Janko
    Date: 2008–01–11
  18. By: Ansgar Belke; Walter Orth
    Abstract: The belief that house prices are driven by specific regional and institutional variables and not at all by monetary conditions is so entrenched with some market participants and some commentators that the search for empirical support would seem to be a trivial task. However, this is not the case. This paper investigates the relationship between global excess liquidity and asset prices on a global scale:How important is global liquidity? How are asset (especially house) prices and other important macro variables like consumer prices affected by global monetary conditions? This paper analyses the international transmission of monetary shocks with a special focus on the effects of a global monetary aggregate ("global liquidity") on consumer prices and different asset prices.We estimate a variety of VAR models for the global economy using aggregated data that represent the major OECD countries. The impulse responses show that a positive shock to global liquidity leads to permanent increases in the global GDP deflator and in the global house price index, while the latter reaction is even more distinctive. Moreover, we find that there are subsequent spillovers to consumer prices. In contrast, we are not able to find empirical evidence in favour of the hypothesis that the MSCIWorld index as a measure of stock prices significantly reacts to changes in global liquidity.
    Keywords: Global liquidity, inflation control, international spillovers, asset prices, VAR analysis
    JEL: E31 E52 F01 F42
    Date: 2007–12
  19. By: Zuzana Janko
    Date: 2008–01–11
  20. By: John Bryant (Vocat International)
    Abstract: This paper develops further a thermodynamic model of a monetary system, first set out as part of a paper by the author, published in 2007, entitled A Thermodynamic Theory of Economics. The model is backed up by statistical analysis of data of the UK economy 1969-2006. The model sets out relationships between price, output volume, velocity of circulation, money supply and interest rates, and develops an equation to measure the rate of entropy loss from an economic system.
    Keywords: Monetary model, thermodynamics, economics, entropy, money, UK economy
    Date: 2008–04
  21. By: Viktoria Hnatkovska; Amartya Lahiri; Carlos A. Vegh
    Abstract: What is the relationship between interest rates and the exchange rate? The empirical literature in this area has been inconclusive. We use an optimizing model of a small open economy to rationalize the mixed empirical findings. The model has three key margins. First, higher domestic interest rates raise the demand for deposits, and, hence, the money base. Second, firms need bank loans to finance the wage bill, which reduces output when domestic interest rates increase. Lastly, higher interest rates raise the government’s fiscal burden, and, therefore, can lead to higher expected inflation. While the first effect tends to appreciate the currency, the remaining two effects tend to depreciate it. We then conduct policy experiments using a calibrated version of the model and show the central result of the paper: the relationship between interest rates and the exchange rate is non-monotonic. In particular, the exchange rate response depends on the size of the interest rate increase and on the initial level of the interest rate. Moreover, we also show that the model can replicate the heterogeneous responses of the exchange rate to interest rate innovations in several developing economies.
    JEL: E52 F41
    Date: 2008–04
  22. By: Dobromil Serwa (Warsaw School of Economics, National Bank of Poland)
    Abstract: We propose a method for calculating the macroeconomic costs of banking crises that controls for the downward impact of recessions on banking activity. In contrast to earlier research, we estimate the cost of crises based on the size of banking crises. The extent of a crisis is measured using banking sector aggregates. The results, based on our method and data from over 100 banking crises, suggest that the size of a crisis matters for economic growth. Lower credit, deposit and money growth during crises cause GDP growth to decline.
    Keywords: banking crises, costs, output growth, event-study
    JEL: C32 E51 G21 G15
    Date: 2008–03–25
  23. By: Koivu, Tuuli (BOFIT)
    Abstract: Chinese authorities have traditionally relied mainly on administrative and quantitative measures in conducting monetary policy, with interest rates playing a less prominent role. Additional support for this view resides in a number of earlier studies that have found that the impact of interest rates on the real economy has been miniscule. However, taking into account numerous reforms in the financial sector and more widely in the Chinese economy, interest rates may have gained some influence in the last few years. It is important to study the effectiveness of interest rates also in light of future reforms of the monetary policy tools in China. Whereas administrative policy measures were effective in guiding the behaviour of state-owned enterprises, the authorities may need to increase the use of more market-oriented monetary policy tools as the share of the economy in private and foreign ownership grows. We use a vector error correction model to study, within a credit demand framework, whether the impact of interest rates in China has become stronger over the last decade. Our results suggest that loan demand has indeed become more dependent on interest rates, albeit the channel from interest rate to the real economy is still weak.
    Keywords: China; monetary policy
    JEL: E52 P24
    Date: 2008–04–03
  24. By: Victor Zarnowitz (The Conference Board)
    Abstract: Prior to the second half of the twentieth century, the economy of the United States was distinguished by cyclical instability and low growth; however, since the end of WWII, business cycles have moderated, coupled with relatively higher economic growth. Characteristically, in the second half of the twentieth century, periods of expansion were on average six times as long as periods of contraction, with growth cycles being more symmetric in nature. This paper addresses several internal dynamics behind business cycles (mainly endogenous constructs) and outside impulses or disturbances (theories with major exogenous and stochastic elements) that can be attributed to modern business cycle depth and duration. Reasons outlined for this observed business cycle moderation include more effective countercyclical policy by the Federal Reserve, the lack of financial crises and major depressions marked by big business and bank failures, a shift in the structure of global market economies and the employment of automatic stabilizers.
    Date: 2007–11
  25. By: Zuzana Janko
    Date: 2008–01–11
  26. By: Dobromil Serwa (Warsaw School of Economics, National Bank of Poland)
    Abstract: The paper employs a recently developed procedure, based on a bivariate Markov switching model, to analyze the asymmetric causality linkages between credit growth and output growth during banking crises. Using a sample of 103 banking crises, we find that neither credit nor output leads the other variable in calm and crisis periods, although there is evidence of instantaneous regime-interdependence between the banking and real sector during crises. The linear link between credit growth and output growth is also regime-dependent.
    Keywords: banking crises, credit growth, output growth, Markov switching model, causality
    JEL: E32 E51 G21 C12
    Date: 2008–03–25
  27. By: Hasan, Zubair
    Abstract: Abstract. This paper deals with a still unresolved issue - credit creation and control- in an interest free banking system. The available literature on the subject is scanty, controversial and inconclusive. The paper holds that credit creation per se is not un-Islamic; the essential point is how credit is generated and used. It argues that credit creation cannot be banished; it is an imperative for frictionless adjustment of money supply to unavoidable fluctuations in its demand in modern economies. It seeks to correct the misunderstanding in the literature that banks create credit ex nihilo.Demand for money apart, fiscal policies and foreign exchange transaction erode the credit controlling power of the central banks. The paper blames major difficulties including those of credit creation and control on the evolution of Islamic banking on the same pattern as its mainstream counterpart and suggests some structural modifications. Finally, it finds the conventional weapons of credit control inefficacious for use in an interest free banking system and suggests the inclusion of a ratio of cash to bank advances among them. The paper has some important technical and policy implications.
    Keywords: Credit creation;demand for money;Base money; Credit control; Central bank
    JEL: E0 E51
    Date: 2008
  28. By: Chew Lian Chua; Sarantis Tsiaplias (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)
    Abstract: This paper examines whether the disaggregation of consumer sentiment data into its sub-components improves the real-time capacity to forecast GDP and consumption. A Bayesian error correction approach augmented with the consumer sentiment index and permutations of the consumer sentiment sub-indexes is used to evaluate forecasting power. The forecasts are benchmarked against both composite forecasts and forecasts from standard error correction models. Using Australian data, we find that consumer sentiment data increases the accuracy of GDP and consumption forecasts, with certain components of consumer sentiment consistently providing better forecasts than aggregate consumer sentiment data.
    Keywords: Bayesian; Composite forecast; Consumer sentiment; Cointegration.
    JEL: E27 C32 C11
    Date: 2008–02
  29. By: Drumea, Cristina
    Abstract: The globalization of the economic activity is profoundly changing long established concepts, customs and ways of doing business all around the globe. One of those concepts is the currency. The globalization and the Internet, really two facets of the same phenomenon, people hugely removed in every way, can meet in the marketplace to exchange their wares. Which money should they use? Is the government issued currency fit for all the exchange purposes? This article will attempt to paint one more way in which the large corporations can act more like national governments.
    Keywords: alternative money; globalization; Government's policy; new fiat currencies
    JEL: D23 E31 E59
    Date: 2007–07
  30. By: Di Bartolomeo Giovanni; Acocella Nicola; Hughes Hallett Andrew
    Abstract: The paper studies the relationship between equilibrium existence in LQ games and the classical theory of economic policy, generalizing some recent results. In particular, by focusing on system controllability instead of the controllability by one or some of the players, we find conditions for the existence of the Nash equilibrium that extend those required by the previous literature. The usefulness of our results is described by some examples in the field of international monetary and trade agreements.
    JEL: C72 E52 E61
    Date: 2008–04
  31. By: Rod Tyers; Iain Bain
    Abstract: With exports almost half of its GDP and most of these directed to Europe and North America, negative financial shocks in those regions might be expected to retard China's growth. Yet mitigating factors include the temporary flight of North American and European savings into Chinese investment and some associated real exchange rate realignments. These issues are explored using a dynamic model of the global economy. A rise in American and European financial intermediation costs is shown to retard neither China's GDP nor its import growth in the short run. Should the Chinese government act to prevent the effects of the investment surge, through tighter inward capital controls or increased reserve accumulation, the associated losses would be compensated by a trade advantage since its real exchange rate would appreciate less against North America than those of other trading partners. The results therefore suggest that, so long as the financial shocks are restricted to North America and Western Europe, China's growth and the imports on which its trading partners rely are unlikely to be significantly hindered.
    JEL: C68 E17 F21 F17 F43 F47 O5
    Date: 2008–04
  32. By: Stefan Ederer
    Abstract: This paper aims at empirically assessing the demand effects of changes in functional income distribution for the Netherlands. Based on a Neo-Kaleckian theoretical macroeconomic model, equations for the main demand aggregates (consumption, investment, exports and imports) are estimated. The effect of an increase in the wage share on these aggregates is calculated from comparative static. Alternatively, a simulation of this effect is run by means of a small macroeconomic model. An increase in the wage share would have positive effects on consumption and affects investment and net exports negatively. The overall effect is still positive; the demand regime is wage-led. A shift in income distribution in from profits to wages would therefore stimulate aggregate demand. The Dutch wage policy since 1982 which aimed at restraining real wages seems to have increased international competitiveness but not aggregate demand.
    Keywords: consumption, distribution, demand, foreign trade, investment, Keynesian economics, macroeconomics
    Date: 2008–03–07
  33. By: Aoki, Shuhei
    Abstract: Using a simple framework, I reexamine the Hayashi and Prescott hypothesis (2006) that a barrier to labor mobility that maintained high agricultural employment was a cause of the stagnation in the prewar Japanese economy. I find that the labor misallocation between the agricultural and non-agricultural sectors had larger negative effects on the prewar Japanese aggregate productivity than on the postwar aggregate productivity. However, this is not because the wage differential between the sectors was larger but because the agricultural nominal share was larger in prewar Japan. Finally, I show that a model that does not assume a barrier to labor mobility can explain the change in the prewar and postwar agricultural employment rate and nominal share. These results suggest that factors other than labor misallocation are responsible for the stagnation in the prewar Japanese economy.
    Keywords: agriculture; barrier to labor mobility; prewar Japan; resource misallocation; two-sector model
    JEL: O1 N3 N5 E1 O4
    Date: 2008–04–09
  34. By: Frait, Jan (Czech National Bank); Komárek, Luboš (Czech National Bank)
    Abstract: The paper aims to enrich the debate on the overvaluation/undervaluation of China yuan Renminbi (CNY) against USD and JPY by applying the concept of the Debt-Adjusted Real Exchange Rate (DARER). This approach is offering to monetary policy makers another indicator for more responsive management of this important economic variable. The general motivation for constructing DARER is the fact that long-term current account surplus (deficits) is linked with capital outflows (inflows), which often leads to real undervaluation (overvaluation) of domestic currency. DARER can signal to the authorities that the real exchange rate is becoming unsustainable in the medium term. Based on the DARER approach we also introduce three indicators of exchange rate misalignment.
    Keywords: Exchange rate ; current account ; misalignment ; China ; DARER
    JEL: E58 F31 F32 F37
    Date: 2008
  35. By: Francesco Giavazzi; Michael McMahon
    Abstract: In 1997 Chancellor Kohl proposed a major pension reform and pushed the law through Parliament explaining that the German PAYG system had become unsustainable. One limitation of the new law -- one that is crucial for our identification strategy -- is that it left the generous pension entitlements of civil servants intact. The year after, in 1998, Kohl lost the elections and was replaced by Gerhard Shroeder. One of the first decisions of the new Chancellor was to revoke the 1997 pension reform. We use the quasi-experiment of the adoption and subsequent revocation of the pension reform to study how households reacted to the increase in uncertainty about the future path of income that such an event produced. Our estimates are obtained from a diff-in-diff estimator: this helps us overcome the identification problem that often affects measures of precautionary saving. Departing from the majority of studies on precautionary saving we also analyze households' response in terms of labor market choices: we find evidence of a labor supply response by those workers who can use the margin offered by part-time employment
    JEL: E21 E61 J22
    Date: 2008–04
  36. By: Lahiri, Soumitra
    Abstract: Starting from February 2007 world market is facing what we call enantiodromia. The indices are correcting. It is not known whether this is the final correction but there is no doubt that the bubble has burst and air out of it is gushing out slowly (fast on an extended time frame). The biggest question faced by the world now is whether the bursting of the bubble will bring in a deflationary environment as seeds of deflation are seen already germinating very much within the core of rampant inflation envisaged everywhere. ‘Ke sera sera’ whatever will be, will be, but is it not important to investigate as to how this economic menace could happen unnoticed by all? Was there any game plan conceived by a few nations to make best use of the last bit of the Grand Supercycle that began around 1789? Is it not important to rescan flaws remaining within the very system of capital flow/accumulation and control? The science of war, too, has undergone a sea of change. It is no more a concept of battle of arms restricted to a specific war field. With the advent of globalization the boundaries between countries have diluted. The new warfare recognizes no geographical boundaries. It is clash of finance versus finance with ultimate objective remaining the same: worldwide destruction and impoverishment of the rest of the world. Terrorist activities too come within the ambit of this new framework of warfare that is nothing but deployment of combinations. This is return of World War again. Whether we accept or not, truth remains, World War III is going on, possibly since the year 1982. Having notices the cancer growing underneath the beautiful skin of economic boom one and a half year back, we walked up to several publishers and a renowned university in India to help us send across the message to the millions across the world. Context of the book trashing the economic situation then, made all skeptical to go ahead and publish the same. This prompted me to put this book up in the air as an e-book in an effort to bring this into the eye of the millions that surf the net everyday. Which too did not fair well, and before I could do anything to bring this subject to the eyes of the common man, the debacle occurred. Had it been published at the right time, thousands, if not millions that lost heavily in the economic crash, may have had a way to save something in the landslide. However, as the book sites, there is a lot remaining to happen. Furthermore, the same can be used to avoid similar instances in future.
    Keywords: World war; economic world war; technical analysis; world economy; market bubble; market mania; terrorism; market melt down; Elliot Waves
    JEL: D53 E58 A12 F02 E44 B00 A14
    Date: 2007–04–12
  37. By: Menzie D. Chinn; Jeffrey A. Frankel
    Abstract: The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2015.
    JEL: E42 F0 F02 F31
    Date: 2008–04
  38. By: Andolfatto, David
    Abstract: We study a version of the Diamond-Dybvig Green-Lin model with a strategic banker.
    JEL: E5
    Date: 2007–06
  39. By: Zuzana Janko
    Date: 2008–01–11
  40. By: Tom-Reiel Heggedal and Karl Jacobsen (Statistics Norway)
    Abstract: This paper studies the timing of subsidies for environmental research and development (R&D) and how innovation policy is influenced by the costs of emissions. We use a dynamic computable general equilibrium (CGE) model with both general R&D and specific environmental R&D. We find two results that are important when subsidizing environmental R&D in order to target inefficiencies in the research markets. Firstly, the welfare gain from subsidies is larger when the costs of emissions are higher. This is because a high carbon tax increases the social (efficient) investment in environmental R&D, in excess of the private investment in R&D. Secondly, the welfare gain is greater when there is a falling time profile of the rate of subsidies for environmental R&D, rather than a constant or increasing profile. The reason is that the innovation externalities are larger in early periods.
    Keywords: Applied general equilibrium; endogenous growth; research and development; carbon emissions.
    JEL: E62 H31 O38 Q55
    Date: 2008–04
  41. By: Ricardo N. Bebczuk (Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS) - Universidad Nacional de La Plata)
    Abstract: El presente estudio cuantifica el efecto directo de la dolarización sobre la pobreza en Ecuador. Para ello, en base a información de la Encuesta de Condiciones de Vida para 1999 y 2005/6, se corren microsimulaciones para evaluar cuatro canales directos de transmisión entre dolarización y pobreza, a saber: (1) el cambio en la estructura de empleo y salarios a favor de bienes no transables, atribuible a la apreciación del tipo de cambio real; (2) el cambio de la estructura de gasto de los hogares a favor de bienes transables, por idéntico motivo; (3) la pérdida de poder adquisitivo de las remesas del exterior; y (4) la expansión del crédito de la mano de la estabilidad y crecimiento post-dolarización. La dolarización parece haber tenido un significativo efecto reductor de la pobreza, explicando entre el 22% (pobreza moderada) y el 31% (pobreza extrema) de la caída total observada en el headcount. Para el caso de la brecha, estos valores ascienden a 27% y 40%. La mayor incidencia la ha tenido el abaratamiento de los bienes transables en la canasta de consumo (responsable del 64% del efecto total) y la reasignación laboral hacia el sector no transable (32% del efecto total). Tanto el efecto positivo del crédito como el negativo de las remesas resultaron relativamente bajos. Por otra parte, regresiones logit revelan que la probabilidad de ser pobre fue 10 puntos porcentuales inferior en 2005/6 respecto a 1999, sugiriendo que los factores macroeconómicos han jugado un papel significativo en la reducción observada de los niveles de pobreza. Si bien el veredicto sobre la dolarización resulta positivo en términos de pobreza, es indudable que reducciones adicionales requerirán el logro de altas tasas de crecimiento a nivel agregado que beneficien a los sectores de menores ingresos.
    Date: 2008–04
  42. By: Ozturk, Orgul
    Abstract: This paper structurally models and estimates the employment effects of minimum wages in inflexible labor markets with fixed employment costs. When there are fixed costs associated with employment, minimum wage regulation not only results in a reduction in employment among low productivity workers but also shifts the distribution of hours for the available jobs in the market, resulting in scarcity of part-time jobs. Thus, for sufficiently high employment costs, a minimum wage makes it less likely for "marginal" workers to enter and stay in the labor market and has important employment effects. I estimate the model using survey data from Turkey. I find significant reduction in employment due to the loss of part time jobs caused by the national minimum wage policy in this highly inflexible labor market.
    JEL: E2 J3 J2
    Date: 2006
  43. By: Harin, Alexander
    Abstract: The principle of uncertain future: the probability of a future event contains an (hidden) uncertainty. The first consequence of the principle: the real values of high probabilities are lower than the preliminarily determined ones; conversely, the real values of low probabilities can be higher than the preliminarily determined ones. The first consequence provides an uniform solution of the underweighting of high and the overweighting of low probabilities, of the Allais paradox, risk aversion, loss aversion, the equity premium puzzle, the “fourfold pattern” paradox, etc. The second consequence: the present probability system of a future event is incomplete. The second consequence provides a solution of the incompleteness of systems of preferences, of ambiguity aversion, of the Ellsberg paradox, etc.
    Keywords: uncertainty; risk; utility; choice; decisions; probability
    JEL: D81 C5 A1 E17 B4 D01
    Date: 2008–04–08

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